After a volatile summer, the iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB) has rebounded somewhat to gain 3.7% over the past month. Though modest by the standards of IBB and rival biotechnology exchange traded funds, the ETF’s recent bullishness could be a harbinger of more significant upside to come.

Greater scrutiny over drug prices and potential regulatory action would greatly hinder the industry’s ability to turn a profit, especially as repeated price increases have been a key driver of revenue for biotechs, even as demand has diminished. [Clinton Delivers Poison Pill To Biotech ETFs]

Many biotechnology companies have been shifting away from blockbuster drugs and developing more specialty drugs to treat specific diseases. The specialty drugs have also come with a higher price tag. Following political posturing on the issue of drug prices, biotech firms need to be cognizant of price, but that may not deter a near-term rebound for the sector.

If IBB “does move above the trendline we will know it was due to a definitive change in mood when perception of value suddenly changed,” reports Michael Kahn for Barron’s. “It would be a far more reliable breakout than one that takes place without a pause. Momentum-based pushes though trend lines are much more likely to fail than perception-based breakouts following pauses.”

Biotech fundamentals, broadly speaking are sound, but plenty of critics point to the industry’s richer-than-average multiples, which could make the likes of IBB vulnerable to more downside. Gven the lofty year-to-year returns, some are growing cautious over the biotech sector. Some argue that the high valuations in the biotech sector have been supported by a low interest rate environment. [Don’t Mess With the Leveraged Biotech Bull]

Investors who are wary of a potential biotech pullback can utilize a few inverse or bearish ETF options to hedge their positions. For instance, the recently launched Direxion Daily S&P Biotech Bear Shares (NYSEArca: LABD) takes the -3x or -300% daily performance of the biotech sector, ProShares UltraPro Short NASDAQ Biotechnology (NasdaqGM: ZBIO) tracks the -3x or -300% daily performance of the Nasdaq Biotechnology Index, ProShares Ultrashort Nasdaq Biotechnology (NasdaqGM: BIS) tracks the -2x or -200% daily performance of the biotech space and ProShares UltraShort Health Care (NYSEArca: RXD) follows the -2x or -200% daily performance of the broader healthcare sector.

iShares Nasdaq Biotechnology ETF

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.